Looking for Labor Market Inefficiencies

Miriam Gottfried and Laura Cooper have written an article in the Wall Street Journal this week about billionaire investor Robert Smith and his private equity firm, Vista Equity Partners. The article examines the company's secretive "formula" for evaluating investment opportunities and enhancing performance in portfolio companies. I was particularly struck by the fact that the company uses an intelligence test to evaluate job candidates. Here's an excerpt describing this test: 

A proprietary cognitive assessment, similar to an IQ test, includes questions on logic, pattern recognition, vocabulary, sentence completion and math. The test inspires consternation and fear among existing employees, according to former employees. Vista primarily hires job applicants who do well, often young people with modest credentials or experience. These are its “high performing entry-level” workers, or HPELs.

Later in the article, Gottfriend and Cooper describe the people often hired by Vista Equity Partners:

Most of the people Vista hires score highly on the cognitive test. Often they are young employees with less-impressive credentials or experience. These HPELs, as they are known, may have gone to state universities and be willing to do a job for $75,000 that an Ivy League graduate in a high-cost market would demand twice as much for.

I've always been highly skeptical of using intelligence tests to evaluate job candidates for several reasons. First, I'm never quite sure of the validity of the tests being used. Second, I think performance on the job is driven by many factors beyond raw intellectual horsepower. Emotional intelligence, ability to work on a team, communication skills, and other skills play a major role in a new employee's success in the workplace. Finally, I wonder if these tests do have a bias toward younger candidates who have recently completed school (the article discusses this point). 

Having said that, the interesting part of Vista's strategy seems to be its use of the test to target exceptionally intelligent candidates from lesser-known colleges and universities. Vista seems to recognize that companies often pay a hefty premium for graduates from elite institutions such as Columbia, where company chief executive Robert Smith earned his MBA. Companies have a hard time evaluating young candidates, and so they use a diploma from an elite school as a signal of quality. 

However, firms may be missing the opportunity to recruit great talent if they focus exclusively on the "signal" provided by a degree from an elite institution. What if a firm could identify the best talent from the non-elite schools and thereby acquire great talent at a much lower price? That seems to be the question that Vista has asked and tried to answer using this intelligence test and other tools. They appear to be using the test to exploit a labor market inefficiency. The article, unfortunately, does not have too much detail on the Vista approach, given the highly secretive nature of the firm's methods. It would be interesting to know more so as to ascertain the merits and drawbacks of this aproach.